HERE Maps on Sale – The mapping derby begins

As you may have read in the WSJ , Forbes, or other sources, Nokia’s mapping unit HERE is in play. While I do not find this item to be “news,” it has attracted a great deal of publicity and speculation on the estimated value of the company, the potential strategic benefits for the winner of the auction, and the companies that might be interested in acquiring the property. (Read my August 2014 blog on HERE, for more information on the company’s problems and its future – “here”, so to speak. The comments in my 2014 article seem especially pertinent given today’s news.)

Background

Let’s discuss some background items that I consider relevant to the discussion on the potential acquisition of HERE.

First, every company that has any association with navigation has known for a long time that HERE could be acquired for a “very reasonable price.” It is not as if owning HERE has provided any strategic or financial advantages for Nokia, especially after the sale of its handset unit. However, the diehards at Nokia and HERE will express indignation at this statement and respond that selling HERE was never considered before now. Yeah, right – if you believe that, well, wait until you get a job in senior management!

Second, HERE is not now nor has it ever been a consumer-facing business. Re-architecting it to function as a “visible” and valuable consumer brand, while maintaining the company’s role as automobile industry supplier, would likely not be an easy task for any potential acquirer.

Third, HERE revenue for 2014 came in at EUR 969M. Another evaluation had HERE’s EBITDA at $168M. Then, as now, the company’s operations ran a modest loss.

Insightful due diligence might reveal the reason behind the loss, but these problems might not be of significant interest to a strategic buyer determined to be a player in the navigation space. After all, Google Maps is the best game in town and you are not going to catch them by standing still or wringing your hands over something that needs improvement.

Although I do not have access to any “insider” information, I suspect the lack of significant growth in HERE’s financials is related to a) a lack of strategic leadership by Nokia, b) inefficiencies related to the loss of the “Navteq Corporate Memory” caused by the departure of numerous senior personnel from the company who, for one reason or another, did not continue with the company after its acquisition by Nokia (2008), and c) non-optimal revenue generation (i.e. below what was in the plan). My take is that sales have been difficult to conclude for, at least, two reasons. One weakness that I believe is providing inroads for competitors is the perception of declining data quality in HERE’s mapping and support databases. Second, HERE’s owner has “Nokia-ized” the sales process and its “telecom-based approach” to the automobile market has alienated current and potential customers.

Fourth, Nokia acquired Navteq for EUR 5.7 billion in 2008 and the value of the asset has declined since that time. In 2014 Nokia took a EUR1.2 billion impairment charge, as it revalued HERE at EUR2 billion. As noted in the articles linked to at the start of this one, preliminary current estimates of the “bid” value for HERE may range from EUR1 billion to EUR 4 billion.

The fifth background piece for the acquisition puzzle deals with the “potential” rights (if any) related to HERE that Microsoft may have received when it acquired Nokia’s handset division. Yes, there was a side deal for the use of HERE maps for an extended period of time, but there was also the issue of warrants and rights that were not definitively described in the press release on the deal.

Who might be interested in acquiring HERE?

A wide-range of companies could be interested in acquiring HERE. Let’s look at some of the most frequently mentioned (but not necessarily the likeliest).

Uber –
Uber is at the top of everyone’s list, but I am not in that camp. However, when companies are not required to be economically rationale and have a high valuation, anything is possible. From my perspective, Uber is a user of map data, but does not need to own the map database (unless Google were going to acquire HERE and Apple were to acquire TomTom). Google? – Well, they didn’t want anyone else to own WAZE, but general antitrust considerations (along with their current problem in Europe) make it unlikely they will play this time around.

Back to Uber – Rather than buying Here, it should be hot at work investigating or developing methods to utilize its drivers maneuvers while on duty to map the paths used for transportation throughout the areas where the company operates. In other words, Uber could adapt the WAZE model to map its paths if it wants to transition away from commercial map data providers. Uber does not need to own a global database of streets, as there are limited benefits to maintaining data on streets and roads on which their drivers will never pilot an Uber-mobile.

Automobile Manufacturers/Suppliers Consortium
I can see HERE being attractive opportunity for a consortium of automobile manufacturers, as these companies fear the strategies of Google and Apple for invading the car. I suspect this would be the worst thing that could happen to HERE as automobile manufacturing companies are notoriously fickle and slow-footed. Indeed, it is hard to see a group of automobile manufacturers agreeing on anything over an extended ownership period. It would be extremely difficult for such a consortium to agree on a map compilation program that did not favor their most successful markets (what a battle that would be).
While owners can focus the resources of a company wherever they prefer, focusing map compilation on popular markets for in-car navigation could reduce the possibility of leveraging the data to other commercial markets and applications that need relatively uniform coverage everywhere. A limited map compilation strategy might result in decreasing profits and decreased map update frequency. Oh, here we go again. Isn’t this type of problem what happened to HERE over the last seven years?

One of the articles I read on this topic suggested there may be some discussions between Nokia and a consortium of German car makers. Hmmm. This could be the answer to the question I posed in last year’s blog when discussing why Halbherr would leave HERE before it was sold – but maybe not.

Microsoft
Microsoft could have done this deal numerous times before now if it were really interested. Nokia needed a lifeline when it sold its handset division to Microsoft, but the big Softy appears to have been satisfied with a long-term contract for map data. I do not see maps as a large part of Microsoft’s future, but the acquisition of HERE would depend on how much of an advantage owning HERE would be in helping Microsoft to become a significant player in automobile information and navigation systems. Microsoft’s map offerings are currently at relative disadvantage to Google regarding what it can offer the automobile manufacturers and may soon be behind Apple, as well. Whether Microsoft moves to acquire HERE may depend on how comfortable they might be in partnering with a potential new owner of HERE. I expect Microsoft may be able to exert some persuasion on the acquisition of HERE as a result of codicils in their previous deal with Nokia, but that is a supposition on my part and may be entirely wrong.

Apple
Apple certainly needs help if it ever wants to grow its mapping capabilities beyond the current IOS-based handset market. However, with the exception of Beats Audio, Apple seems more willing to develop technology on its own by acquiring small shops that exhibit abilities that Apple believes would help them tune their existing efforts. Their mapping acquisitions have been modest and their partnership with TomTom may preclude them from feeling any need to participate in the auction.

Utilities
While it may not happen, one of the most interesting options is for a technology infrastructure company to acquire HERE. Map data and navigation have become a utility and should be produced and distributed by a company that understands this type of business. Although it’s map data with all the inherent peculiarities and difficulties with data collection, processing and use, it is still data of various flavors that need to be delivered to a specific customer-type at the point of use. Networking companies, Intel, or other hardware/services/systems providers who understand the necessary model could be well poised to make a run at HERE. By the way, Intel is used only as an example. They have already been burned in the map market.

Handset Manufacturer Consortium
Samsung is one of the possibilities in this category, as it is unhappy with the strategic positions of Google and Apple in regard the smart phone market. Industry rumors abound that Samsung considered joining a coalition of companies organized to come up with an alternative to Google Maps and Apple Maps. Whether Samsung should seriously think that owning a map company can improve its strategic position in the handset market or as a technology provider, in general, remains an interesting issue for me. While Samsung could play the role of a “utility,” it is unlikely that it would have the expertise or management skill to develop HERE in an advantageous manner. It is for this reason that Samsung, or a similar company, might partner with other handset providers, as well interested automobile manufacturers or suppliers, to bid on HERE. Note: somewhere in the mix you will undoubtedly find a map company or possibly a traffic-reporting company.

There are tons of possible suitors, but this blog is already too long, so let’s cut to the chase and talk price.

Valuation
Nokia’s hope is that a bidding war erupts between companies that have no need to think of their valuation of HERE as “real” money. Traditional companies, such as those associated with the automobile industry, will be unlikely to drop a gazillion to purchase HERE. Internet services companies might be inclined to pay a higher price, if they consider the time value of money to be irrelevant in the face of acquiring what might become a sustainable competitive advantage in future markets important to their strategy.

If one were aiming to duplicate the range of attributes, data quality and data specifications that were engineered into the original process designed by Navteq, then building an asset base comparable to the current quality and functionality of the database owned by HERE would take a considerable amount of time and money (although less than was required by Navteq). The unknown is how well HERE has maintained, enhanced and or expanded its database since the acquisition of Navteq by Nokia and this question can only be answered by the requisite due diligence.

My belief is that significantly more than half the value of the company is based on the value of the data. Unfortunately, without testing the data it would be difficult to know: 1) the value of the database without examining the current data collection and processing infrastructure, and 2) the potential degradation of the database’s quality, if any, during Nokia’s ownership. Valuing the enterprise (infrastructure, brand, etc.) sans database would be an easier task, but no one would be interested in acquiring the company and not the data.

If pressed, on an intellectual basis I could agree with Nokia that a value of EUR2 billion for HERE could be justified. Unfortunately, I doubt that Nokia is willing to spend the money to maintain the data in a state equivalent to or exceeding its current quality. If this is the case, then the company is between a rock and hard place, since time will diminish the value of its assets. My conclusion is that the sale of HERE is tilted to the buyer’s advantage. In addition, if the quality of the HERE database has slipped, then the multiple will decrease and the the price should fall closer to EUR1 billion.

Time will tell.

By the way, we have retained Mr. Tudball and….ahhhh…. Misses Wiggins to represent TeleMapics in the bidding for HERE. Well, somebody has to interject comedy into this deal!

Best wishes to all.

Dr. Mike

Minor updates on 4/16/15 to correct one typo and the wording of one sentence.

Fascinating analysis as always, Dr. Mike. Will be interesting to see how this plays out…

Hi, Scott:

Good to hear from you and thanks for your comment. Hope all is well.

Yes, it will be fun to see how the mapping world shakes out. I have been spending some time diving into the possible scenarios and find them quite interesting. Next week I hope to publish a blog about the possible future of iCars and Android-mobiles in the world of autonomous vehicles.